Two of entrepreneurs’ favorite topics are growth and scaling in business. The words are thrown around a lot, but the enthusiasm with which they’re used often outpaces the accuracy.
Many people use these words to mean the same thing: a company getting bigger, gobbling up more market share, and making more money.
But there’s a crucial difference between growth and scaling in business terms, and it’s an important distinction to understand what really happens when businesses grow and what kind of growth you should be looking for.
Growth vs. Scaling
What is growth in business?
When companies grow, they are increasing their revenue equally as fast as they are adding resources to enable that increase. The company may gain $50,000 in new revenue, but in order to do so they had to hire a new sales rep with a $50,000 salary. The company’s gains and losses are evened out, so even though the company is growing — by one new employee and a corresponding uptick in revenue — it really hasn’t gained much value.
What is scaling in business?
When companies scale, on the other hand, they add revenue at a faster rate than they take on new costs. A company that is scaling may gain $50,000 in new revenue for which they spent only $5,000 on marketing automation tools to allow more efficient marketing to a wider audience. The company’s gains outpaced its losses, allowing it not only to grow but also to scale.
Planning to Scale a Business
As you launch a new business, you should already be thinking about a strategy for scaling — not just growing. If you simply continue trying to increase your revenue by adding more resources with a corresponding increase in costs, your growth is likely to stagnate. You’ll get to a point where you realize the effort to grow simply isn’t worth the financial gain.
What you need instead is a strategy for scaling your SaaS business that focuses on increasing revenue while also increasing efficiency. In the scaling scenario, it will be worth the effort to reach more customers since you’ll be expending a comparatively low amount and therefore making increasingly large amounts of profit. You’re increasing your company’s value by increasing the efficiency with which you can bring in new revenue.
Strategies for Scaling a SaaS Startup
While all companies can potentially be good at growing, some companies are better positioned to scale than others. Professional services companies, for example, will always have a problem with scaling their businesses because they need new personnel to do the work for each new client they service.
Scaling comes naturally to SaaS businesses
Software companies, on the other hand, are naturals at scaling, since they are able to sell their product to more customers with very minimal added cost. Software-as-a-service (SaaS) companies are even more fortunate when it comes to scaling a business, because they are able to expend minimal extra cost to service long-term customers who will continue to pay month after month.
How SaaS customer acquisition cost (CAC) affects scaling
Although SaaS companies are uniquely positioned to scale easier than others, they can’t simply manufacture revenue out of thin air. While the cost of adding an additional customer to your server is close to null, the costs of getting that customer in the door can be quite substantial.
That’s why Bird contends that customer acquisition cost (CAC) is the key metric that impacts the scaling prospects for SaaS companies.
“In SaaS the cost of sales and marketing is the real marginal cost,” says Bird. “Scaling SaaS is finding a scalable way to lower your customer acquisition costs.”
So, while SaaS companies are naturally good at scaling in business from a technical angle, when it comes to customer acquisition, they are every bit as apt to struggle with scaling as any other company.
It’s possible they’re actually more apt to struggle with the CAC aspect of scaling than other types of companies, because they often sell highly technical products to niche audiences who may be difficult to reach. They may have to spend substantial amounts of marketing to reach new potential buyers.
Luckily those buyers are apt to be long-term customers with high customer lifetime value (LTV), making a relatively high CAC sustainable over time, allowing the company to keep scaling up and up.